Low-Carbon Transition Risk in Mutual Fund Portfolios: Managerial Involvement and Performance Effects

Abstract

Transitioning to a low-carbon economy to mitigate the effects of climate change involves risks. We investigate the effects of managerial ownership and management on the low-carbon transition risk of mutual fund portfolios and the effects of low-carbon transition risk on mutual fund performance and flows. Using a low-carbon transition risk measure based on the unmanaged carbon risk of companies included in fund portfolios, we find that managerial ownership and the socially responsible focus of the fund reduces fund portfolio exposure to carbon risk, whereas active management has the opposite effect. Furthermore, funds with low-carbon transition risk levels yield a better risk-adjusted performance, are more sensitive to tail risks and exhibit better flow performance.




This research was funded by the Ministry of Science, Innovation and Universities (MCIU), the Spanish State Research Agency (AEI) and European Regional Development Fund (RTI2018-100702-B-I00 MCIU/AEI/FEDER, UE).

Keywords: Carbon transition risk, mutual funds, manager ownership, socially responsible investment, mutual fund performance, mutual fund flows

JEL Classification: G11, G23, Q51